Import Letter of Credit (LC)

ICICI Bank

Banks products:
Import Letter of

The ICICI Bank can assist in:

Import Credit Letter Of Bank Guarantee* Credit Term Loans*

Providing payment behalf of the buyer

goods

Providing payment assurance to seller on

Providing assurance seller on assurance to for right quality of

behalf of the respect of the sale Providing finance in buyer

Effecting payment to the seller on behalf of the buyer Handling documents covering the sale
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What is a Letter of Credit?

A bank s written guarantee Made on behalf of a buyer To pay a seller A given sum of money Provided that documents presented Meet the terms specified And are presented within a specified time And at a specified place These elements are common to all LC.

Benefits for the Players

Buyer
Reduces delivery risk Bank oversees regulatory requirements Importer can contract for better terms

Seller
Reduces risk of nonpayment Bank oversees regulatory requirements

Risks Involved

Importer not able to pay Document discrepancy are not identified Issuing bank not able to pay Forged documents Inferior Quality of goods Quantitiy of goods Lost / Damage to goods
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Click here for Case Study on Risks

LC Process
Advising bank gives the shipping documents to Issuing bank 6 Issuing bank pays to advising bank

Buyer s Bank

Issuing bank issues the LC to advising bank 2

Advising bank 3 notifies the seller about the LC Seller s Bank (Advising Bank) Seller submits the proof of shipping to the advising bank 5 Seller

Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping docdocuments.

Buyer s Bank (Issuing Bank)

Buyer

Shipper

Seller sends the goods through shipper and collects proof of shipping

Buyer gives the documents to the shipper and collects goods

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LC Variations

LC Variations

SITUATION
Seller doesn t trust issuing bank Issuing bank wants to have control Middlemen are involved Issuing bank doesn t have an account with the specified bank Repetitive transactions Seller wants advance payment
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LC VARIATION
Confirmation Revocable LC Transferable / Back-toback LC Reimbursement Revolving LC Red Clause LC Standby LC

LC Variations: Confirmation

Issuing bank gives the LC to seller s bank and requests for confirmation
ICICI Bank (Issuing Bank) Seller bank confirms the LC and notifies the seller Seller s Bank (Confirming Bank)

Buyer Shipper

Seller

LC Variations: Confirmation
LC Confirmation implies an undertaking by the confirming Bank in addition to that of issuing Bank to pay under the credit, in case of failure by the LC issuing Bank to pay, provided terms and conditions of LC are complied with.

LC Variations: Revocable / Irrevocable LC

Revocable LC: Issuing bank changes / cancels the LC at own will Irrevocable LC: Issuing bank needs permission of seller before changing LC conditions
Sellers Bank (Advising Bank)

ICICI Bank (Issuing Bank)

Buyer

Seller

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LC Variations: Transferable LC
Issuing bank gives the LC to seller s bank
ICICI Bank

(Issuing Bank)

Sellers Bank (Advising Bank)

On first beneficiary's request, Part of the LC will be transferred to the supplier, the second beneficiary

Seller bank advises the LC to the first beneficiary /Seller

Buyer First Beneficiary / Seller

Shipper

Supplier
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LC Variations: Back to Back LC

Issuing bank gives the LC to seller s bank
ICICI Bank

(Issuing Bank)

Sellers Bank (Advising Bank)

Seller bank advises the LC to the Seller

On Sellers request, an Inland LC will be opened by Sellers Bank favouring the original supplier

Buyer Seller -Middleman

Shipper

Supplier
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LC Variations: Reimbursement

Negotiating bank sends the documents

ICICI Bank

(Issuing Bank)

Issuing bank sends payment instructions to Reimbursing bank

Sellers Bank (Advising Bank & Negotiating Bank)

Reimbursement bank makes the payment to Negotiating bank

Reimbursing Bank Buyer

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LC Variations: Revolving
LC Value US $ 1,00,000

Documents worth US $ 1,00,000 Every month

ICICI Bank

(Issuing Bank)

Payment of US $ 1,00,000 Every month

Same LC is used for these transactions Seller

Sellers Bank (Advising Bank)

Buyer

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LC Variations: Red Clause LC

Issuing bank issues LC and sends it to advising bank Advising bank advises LC & pays money to seller 3 towards preshipment expenses.

ICICI Bank Advising bank gives the shipping (Issuing Bank) documents to Issuing bank 6

Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping

Seller s Bank (Advising Bank)

Seller submits the proof of shipping to the advising bank 5

Buyer

Seller

Shipper
Buyer gives the documents to the shipper and collects goods

Seller sends the goods through shipper and collects proof of shipping

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LC Variations: Red Clause LC

Under Red Clause LC the LC issuing bank authorizes the advising bank / Negotiating bank to give advance to seller towards production/purchase of materials. On giving such advance, the advising bank/Negotiating bank can claim money from LC issuing bank who in turn recovers the money from LC applicant/Buyer.

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LC Variations: Standby

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ICICI Bank Issuing bank issues LC (Issuing Bank)

Advising bank Seller s Bank notifies the seller (Advising Bank) about the LC

Buyer asks his bank to issue an LC against the sales contract

Seller submits the proof of default by the Buyer to advising bank 5 Seller provides the service and obtains proof of delivery

Buyer

Seller

4 SLC is like a Bank Guarantee- It is towards non-performance whereas LC is for performance.

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LC Stages

LC Issue Stages

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LC Stages for Issuing Bank

This sub process is called Issue of LC
Issuing bank scrutinizes the documents, makes system entry & sends presentation memo to the buyer ICICI Bank

Issuing bank opens the LC & sends it to advising bank Advising bank sends the shipping documents to Issuing bank. ICICI Bank (Issuing Bank)
Bank collects the money from buyer and gives him the proof of shipping documents.

Buyer asks his bank to issue an LC against the sales contract

Seller s Bank (Advising Bank)

Seller ships the goods & advises to the documents

Seller

Buyer

This sub process is called Lodgment of Bills Under LC

This sub process is called Realization under LC

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Amendments to LC
During the course of business, buyer and seller may agree to change terms and conditions of contract

If these changes are related to LC already opened, then changes need to be made to LC. This process is called Amendment under LC

The process is similar to LC Issue. However, amendment has to be linked to original LC

In the case of Irrevocable Credits, any amendment to LC requires concurrence of the Beneficiary ( Seller)
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Cancellation of LC
In case the LC is unutilised beyond the expiry date, the LC cancellation process would be started by the bank

Seller/ Buyer may also initiate cancellation, provided the other party gives its consent

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Delivery Order
Sometimes the goods reach before the documents specially when the goods are coming via air. To avoid demurrage, customer takes a delivery order from the bank to receive the goods before the documents reach. For this he provides indemnity letter to the bank. 110% Margin may also be insisted upon

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Realisation under LC

Realisation under LC : Types of bills Usance & Sight

Payment could be mainly of two types: Delivery on payment - Sight Bills Delivery on acceptance - Usance Bills

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